Summary: Main Points on

Choices and Demand

selected answers from chapter 10

PowerPoint presentation of Chapter 10.

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Rational Choice

It is rational to do something until its marginal benefit equals its marginal cost.  The following table shows an example.   It is rational to take this action 5 times, because the marginal benefit of doing this the fifth time, 60, equals the marginal cost.  In this case, the net  benefit from taking this action 5 times is 200.
 
Number of Times
Total Benefit
Marginal Benefit
Total Cost
Marginal Cost
Net Benefit
MB-MC
1
100
100
20
20
80
80
2
190
90
50
30
140
60
3
270
80
90
40
180
40
4
340
70
140
50
200
20
5
400
60
200
60
200
0
6
450
50
270
70
180
-20
7
490
40
350
80
140
-40
8
520
30
440
90
80
-60
9
540
20
540
100
0
-80
10
550
10
650
110
-100
-100
11
550
0
770
120
-220
-120
12
540
-10
900
130
-360
-140
13
520
-20
1040
140
-520
-160
14
490
-30
1190
150
-700
-180
15
450
-40
1350
160
-900
-200
graph of total benefit and marginal benefit
 

These graphs show total benefit TB and marginal benefit MB, using numbers from the table.

The MB curve shows the slope of the TB curve.

The curvature in the TB curve, and the downward-slope of the MB curve, illustrate diminishing marginal benefits.

The curvature in the TB curve and downward-slope of the MB curve both say the same thing -- the MB curve slopes downward because the TB curve is curved rather than a straight line.

graph of total cost and marginal cost
 

These graphs show total cost TC and marginal cost MC, using numbers from the table.
 
 

The MC curve shows the slope of the TC curve.
 

This graph shows that you maximize net benefit by doing something until its marginal benefit equals its marginal cost.
In this example, you maximize net benefit by taking the action 5 times, and the net benefit is 200.
 
 



[A common fallacy]















Anything worth doing at all is worth doing up to the point that its marginal benefit equals its marginal cost.
 
 

Application of Rational Choice to Demand

A rational consumer chooses a quantity demanded of a good so that its marginal benefit equals its marginal cost (its price).

That person's demand curve is her marginal benefit curve.

The demand curve for a good shows the marginal benefit of that good to consumers.

Notice that the height of the demand curve shows willingness to pay for a good.  That is why the area under the demand curve, above the equilibrium price (and up to the equilbrium quantity) shows consumer surplus.
 
 

Sunk Costs

A sunk cost is a cost that has already been paid and cannot be recovered.

Sunk costs are not costs of any actions you could take.

 [BECAUSE]        [EXAMPLE]

As a result, sunk costs do not affect any rational choices.
 
 

2 economics poems written by a recent 108 student:
Economically Efficient?
Rationed

 
 
 
 
 
 
 

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